Starting business charge vat or not?

henrygregory

Hi. I have has a lot of interest from several potential customers who know I understand what devices/solutions they need. I know some great fully ensured suppliers and installers (ltd companies) if I commission these companies to do the work, pay them and then invoice the customer, what do I do about the vat element? I would be charged vat by the installer/supplier and the customer is vat registered to can claim it back.
Obviously I would be adding some cost to the invoice for my own time in sorting the solution for them.
This is my first deal so to speak and I want to make sure I do things correctly.

zenmaster

It's quite simple, but complicated at the same time.

VAT is passed along a chain of VAT registered entities. As soon as it reaches a non VAT registered entity the chain is broken.

I assume you are not VAT registered.

Supplier A (registered) charges you £1000 + VAT. You pay £1200. You add £200 for your services. You cannot either add VAT or reclaim any, therefore you charge customer B (registered) £1400. They cannot reclaim any VAT as you are not registered, so it's cost them £1400.

If you were registered then
A supplies at £1000 + VAT. You pay £1200. You claim back £200, add your £200 and sell it on at £1200+VAT. The customer buys from you for £1440. They claim back £240 so they have paid £1200. You post off £240 to HMRC.

The supplier ends up with the same money, you end up with the same money, the customer gets a cheaper deal. You all have paperwork to do.

Does it matter?

Maybe the customer likes the cheaper deal so buys again or maybe they see your quote against a competitors cheaper quote and you lose the deal.

Best of luck either way.

henrygregory

Thanks so much for your really useful posts. It does seem at the moment,I am at a slight disadvantage as I am not vat registered and this would be my first transaction. I had been looking into becoming a sole trader but I am, unsure if I would make enough for the idea to be viable, so it is quite a gamble at the moment. I have got some quotes from an accountant for simple book keeping and yearly tax return, this would be £300 pa minimum. Is it therefore possible for me to charge vat as in example B and register for it before the end of the financial year? Or would that be illegal?

gb12345

henrygregory wrote: »

Thanks so much for your really useful posts. It does seem at the moment,I am at a slight disadvantage as I am not vat registered and this would be my first transaction. I had been looking into becoming a sole trader but I am, unsure if I would make enough for the idea to be viable, so it is quite a gamble at the moment. I have got some quotes from an accountant for simple book keeping and yearly tax return, this would be £300 pa minimum. Is it therefore possible for me to charge vat as in example B and register for it before the end of the financial year? Or would that be illegal?

You can not charge VAT until you are registered - doing so would be illegal.

However, there is nothing to stop you from voluntarily registering for VAT even if you are below the threshold for being required to do so.

As to an accountant - threr probably is not any need to be paying for one for such a small scale business. Register as self-employed and you will be sent the self-assessment form each year, which isn't that difficult to complete and if you are VAT registered just do the quarterly return.

You should be able to keep track of all of your business's income and expenses using a simple spreadsheet that will give you all the details you require for the VAT return and SA (just need to add in any income from other sources).

It used to take me half an hour a quarter to produce my VAT return and a couple of hours to do the self-assessment. Everything else was done by entering invoices in a spreadsheet as I went along.

henrygregory

gb12345 wrote: »

You can not charge VAT until you are registered - doing so would be illegal.

However, there is nothing to stop you from voluntarily registering for VAT even if you are below the threshold for being required to do so.

As to an accountant - threr probably is not any need to be paying for one for such a small scale business. Register as self-employed and you will be sent the self-assessment form each year, which isn't that difficult to complete and if you are VAT registered just do the quarterly return.

You should be able to keep track of all of your business's income and expenses using a simple spreadsheet that will give you all the details you require for the VAT return and SA (just need to add in any income from other sources).

It used to take me half an hour a quarter to produce my VAT return and a couple of hours to do the self-assessment. Everything else was done by entering invoices in a spreadsheet as I went along.

Thanks very much for your very helpful post. I will look in to registering for VAT as you suggest. I had wondered if it would be possible for me to do my own accounts as I am highly organised and medium skilled at using Excel.

Is there any cost for registering for VAT?

Wywth

henrygregory wrote: »

Hi. I have has a lot of interest from several potential customers who know I understand what devices/solutions they need. I know some great fully ensured suppliers and installers (ltd companies) if I commission these companies to do the work, pay them and then invoice the customer, what do I do about the vat element? I would be charged vat by the installer/supplier and the customer is vat registered to can claim it back.
Obviously I would be adding some cost to the invoice for my own time in sorting the solution for them.
This is my first deal so to speak and I want to make sure I do things correctly.

I presume you are not currently registered for VAT. Therefore you cannot charge any VAT. So your customer cannot reclaim any VAT (as they will not be paying any)

I wonder if you are setting up your business in the best way. By charging your customer for supplying and installing the products, you would be their supplier, and so responsible for any claims they may make.

Would it not make more sense to act purely as an agent, bringing existing suppliers and customers together? That way all you'll be offering is an introduction service for which you can bill your client. Your client can then sign a contract direct with the supplier you introduce.
Not only does this remove most chance of your client making a claim against you, but also mitigates the chance of you getting into financial difficulties.
e.g. what happens in your scenario if you arrange for the work to be carried out and your client fails to pay? Your supplier will still want paying.

henrygregory

Wywth wrote: »

I presume you are not currently registered for VAT. Therefore you cannot charge any VAT. So your customer cannot reclaim any VAT (as they will not be paying any)

I wonder if you are setting up your business in the best way. By charging your customer for supplying and installing the products, you would be their supplier, and so responsible for any claims they may make.

Would it not make more sense to act purely as an agent, bringing existing suppliers and customers together? That way all you'll be offering is an introduction service for which you can bill your client. Your client can then sign a contract direct with the supplier you introduce.
Not only does this remove most chance of your client making a claim against you, but also mitigates the chance of you getting into financial difficulties.
e.g. what happens in your scenario if you arrange for the work to be carried out and your client fails to pay? Your supplier will still want paying.

Hi, thanks for your post, very helpful suggestion. I could well do this, but I suppose my 'agent fee' as you suggested will have to be lower to accommodate for the fact my client would not be able to get the vat back on my fee. I understand what you are staying re bringing supplier and customer together, but would this not make things more difficult in the future as the customer may well just bypass me and go straight to the supplier to get a cheaper deal.

I would be surprised if the client failed to pay as they are reasonably large companies with set regulations on making orders. I would assume the only time they would not pay is if they are unhappy with the service/job, but the suppliers I am planning to use, are really reliable and provide excellent service. I have used them myself for years and have never had any issues.

gb12345

henrygregory wrote: »

Hi, thanks for your post, very helpful suggestion. I could well do this, but I suppose my 'agent fee' as you suggested will have to be lower to accommodate for the fact my client would not be able to get the vat back on my fee.

This is irrelvant - if you are not vat registered you won't be charging them VAT, so they will still be paying the same -

Not-VAT registered

You charge them £200 consultancy fee with no VAT - net cost to them £200.

VAT registered

You charge them £200 consultancy fee and £40 VAT. They then claim back the £40 VAT - net cost to them £200.

henrygregory wrote: »

I would be surprised if the client failed to pay as they are reasonably large companies with set regulations on making orders. I would assume the only time they would not pay is if they are unhappy with the service/job, but the suppliers I am planning to use, are really reliable and provide excellent service. I have used them myself for years and have never had any issues.

Large companies are often the worst at paying as they will drag it out as long as possible, while the purchase order and invoice are approved - will you initially have the cashflow to be able to pay your subcontracter (who may well want paying upfront) while you wait for the client to pay you?

Also the liability point Wywth raised it important to bear in mind - depending on what these devices/solutuon are, you may well need to get public liability insurance as well as professional indemnity insurance.

If something were to go wrong

Wywth

henrygregory wrote: »

Hi, thanks for your post, very helpful suggestion. I could well do this, but I suppose my 'agent fee' as you suggested will have to be lower to accommodate for the fact my client would not be able to get the vat back on my fee.

No. That's not how it works.
Lets assume you charge £100 for your introduction service

If you are not VAT registered, you would bill tyour client £100.
They would pay £100

If you were VAT registered, you would still want your £100 and HMRC will want you to collect £20 VAT from your customer on behalf of HMRC
So you would charge £100 + £20 VAT = £120
Your customer would pay the £120 and (assuming the VAT is considered an input tax to them) they can reclaim that £20, so end up paying the £100 for your services.

henrygregory wrote: »

I understand what you are staying re bringing supplier and customer together, but would this not make things more difficult in the future as the customer may well just bypass me and go straight to the supplier to get a cheaper deal.

They might still do that anyway

henrygregory wrote: »

I would be surprised if the client failed to pay as they are reasonably large companies with set regulations on making orders. I would assume the only time they would not pay is if they are unhappy with the service/job, but the suppliers I am planning to use, are really reliable and provide excellent service. I have used them myself for years and have never had any issues.

The bigger they are, the harder they fall. It's not just small companies that get into financial difficulties. I usually find it's the big companies that are late in paying ... and thats even after allowing for the fact they may already have made you wait 3 or 6 months to be paid in line with the contract they insist upon

Brassedoff

I love these types of thread, in the real world you find people have had the same type of advice. they then come through my door and it earns me so much money.